Misdelivery – Are BLs Good Security Anymore?

BLs have formed an integral part of the trade finance structure. They are often a fundamental security for banks to receive because they give the lawful holder the right of possession to the cargo, and failing that, the right to bring a misdelivery claim against the shipowner that issues the BL. But international trade involves a disjunct: BLs are held by trade finance banks while cargo can be discharged without BLs by traders through letters of indemnity. Banks have allowed such practices to continue without objection with the comfort that if all else fails, they can still bring misdelivery claims against the carrier. But a string case of cases in Singapore and England is recasting these fundamentals of trade finance, with the key question now turning on what a bank would have done it knew cargo was going to be discharged without BLs? The spotlight is now very much on the banks’ actions as gleaned from the recent case of UniCredit Bank A.G. v Euronav N.V. where the English Court of Appeal dismissed a misdelivery claim.


BP Oil International Limited (“BP”) sold a cargo of oil to Gulf Petroleum FZC (“Gulf”) for delivery ex ship Fujairah or Singapore. BP voyage chartered the vessel for the cargo from Euronav N.V. (“Euronav”), who issued a BL to BP for the shipment. UniCredit had financed Gulf’s purchase of the cargo on terms which provided, among other things, that the BL for the financed cargo would be pledged as security, and Gulf’s sub-buyers would pay UniCredit directly. UniCredit paid BP the purchase price and Gulf became owners of the cargo with UniCredit getting security of the BLs. UniCredit however did not receive the BLs by the time of discharge due largely to Covid restrictions. After BP was paid, Euronav, BP and Gulf entered into a novation agreement by which Gulf became the voyage charterer in place of BP.

Euronav discharged the oil on Gulf’s instructions by ship-to-ship (“STS”) transfers against an LOI and without requiring the presentation of any BL. It then transpired that Gulf had perpetrated a fraud on UniCredit and did not repay UniCredit. After receiving the BLs, UniCredit brought a claim against Euronav for the value of the cargo alleging breach of the contract of carriage contained in or evidenced by the BL in delivering the cargo without production of the BL.

Contract of Carriage – BL or Charterparty?

The BL’s all powerful status in misdelivery claims rests on one fundamental basis: that it contains or evidences a contract of carriage. At first instance, the High Court found that the since BP was also the charterer, the BL, when issued to it, was a mere receipt of the cargo, the contract of carriage being contained in the charterparty. After BP novated the charterparty to Gulf, the indorsement of the BL did not, in the court’s view, cause a new contract to spring up between Euronav and UniCredit and as such the bank had no right to pursue a misdelivery claim. The Court of Appeal however disagreed, reasoning that where a BL is issued to a charterer, the presumed intention of the parties is that the BL would not be a contract of carriage only as long as shipper and charterer remained the same entity. On the facts, the BL became a document containing or evidencing the contract of carriage when the CP was novated, and remained so until the date of discharge. There was no term of novation agreement which displaced this intention. At the time of discharge therefore, there was a BL contract between Euronav and UniCredit as the BL holder which was breached by discharge without production of BL.

Misdelivery: Did the Bank cause its own loss?

On the issue of causation, the Court upheld the first instance finding that UniCredit’s loss was not caused by Euronav delivering the oil without the production of the BL. The court considered that it was insufficient to conclude that breach caused the loss simply because in the absence of breach cargo would have initially remained on board the vessel. It was necessary to ask what would have happened to UniCredit’s security interest if Euronav had initially refused to discharge without production of the BL. As to this, the court noted that it was UniCredit’s own case that if Euronav refused to discharge without original BLs, instructions would ultimately be sought from Unicredit. As to what UniCredit would have done, the court below had made a number of significant findings of fact: UniCredit did permit and would have permitted discharge without original BLs; UniCredit would have permitted discharge by STS or would not have halted it upon becoming aware of it; and the loss would have occurred in any event. In making these findings, the court noted the following:

    • It was inherent in the structure of financing and common practice in the oil market for cargo to be discharged without the production of BLs. UniCredit’s witness admitted in cross-examination that she was aware that the cargo would be discharged without BLs, and the original BLs would not be available until after discharge.


  • The court rejected UniCredit’s position that it would specifically not have permitted discharge of the cargo by STS transfers. In reaching this conclusion, the court noted certain factors for example, UniCredit did not take the view that the conditions of the financing had to be strictly followed since it agreed that the cargo would not be discharged into storage at Fujairah, even though this meant that it lost its additional protection of control over storage facilities. Further, a request for STS may not have been entirely abnormal in the prevailing times of Covid induced port congestions.

The court also considered it relevant that UniCredit’s behaviour should be considered against the context where it had no concerns about Gulf falling into default at the time; UniCredit had the benefit of insurance covering 90% of the sub-buyer’s default; and it had confirmed sub-buyers were acceptable.

Comment: Spotlight on the Bank.

A similar inquiry into causation was conducted in the local case of Standard Chartered Bank v Maersk Tankers (2022 SGHC) (see here) where the Singapore High Court examined the underlying financing arrangements and concluded that it was arguable that the bank did not regard the BLs as security. The court had also referred to the first instance decision of UniCredit v Euronav in its analysis. Although not framed as a question of causation, the Singapore High Court in The ‘STI Orchard’ (2022 SGHC) (see here) also examined the underlying financing arrangements and concluded that it was arguable that the bank did not meet the threshold for honest conduct required to be a good faith holder of BLs as it did not look to the BLs as security when it financed the cargo. These recent local cases concerned applications for summary judgment on misdelivery claims, and the shipowners were granted unconditional leave to defend the claims. The judgments on merits are awaited.

That said, these cases do signal a greater scrutiny of banks’ treatment of BLs in their financing arrangements than misdelivery cases have traditionally called for. Not every case will replicate the factual matrix of UniCredit, in particular the court being swayed by the fact that UniCredit was wholly or largely secured in other ways. That said, the message is clear: if the bank wishes to maintain its security over its BLs its conduct with respect to the facility and borrower will have to be consistent with that position. This leaves a bank in a delicate position knowing that cargo is often discharged without BLs or not insisting on such a discharge because other types of security are in place.

So is this the end of the BL as the security backbone of a trade finance structure?


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